Youdao, Inc.

Good day and welcome to the YoDAO 2020 fourth quarter and full year earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeffrey Wong, investor relations director of YoDAO. Please go ahead.

Thank you, operator. Please note that discussion today will contain forward-looking statements related to future performance of the company. which are intended to qualify for the safe harbor from liability as established by the U.S. Private Security Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to the certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and these discussions. A general discussion of these risk factors that could affect use of business and financial results is included in certain filings of companies with the Securities and Exchange Commission, including our annual report filed on Form 20F. The company does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial matters for comparison purposes only. For the definitions of non-GAAP financial measures and recalculations of GAAP to non-GAAP financial results, please see the 2020 fourth quarter and full year financial results with news released issued early today. As a reminder, the conference is being recorded. Besides, a webcast replay of this conference call will be available on UDOT's corporate website at ir.udot.com. Joining us today on the call from UDOT's senior management is Dr. Feng Zhou, our chief executive officer, Mr. Lei Jin, VP of operations, Mr. Peng Su, our VP of strategy and capital markets, and Mr. Wayne Lee, our VP of Finance. I will now turn the call over to Dr. Joe to review some of our recent highlights and strategic directions.

Thank you, Jeffrey, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that all numbers are based on your name. The importance of online education has never been as evident as it was in 2020. 2020 was a banner year for your dollars. Let me start by going over financial and operational highlights across our business. Total gross billings from our online courses reached RMB 1.1 billion in Q4 and RMB 3.1 billion in 2020, up to 22% and 33% year-over-year, respectively. Accordingly, the total revenue achieved was RMB 1.1 billion, in Q4 2020 and RMB 3.2 billion in 2024 year, up 169% and 142% respectively on a year-on-year basis. Paid student enrollments from K-12 reached 659,000 in Q4 2020 and 1.64 million in 2020, up 309% and 357% respectively. on a year-over-year basis. Overall gross margin reached 47.5% in Q4 2020, up over 17% year-over-year. We achieved positive operating cash flow of RMB 129 million in Q4 2020, marking our third quarter of positive operating cash flow in 2020. Our operating cash outflow for 2020 narrowed to RMB 322 million compared with RMB 372 million in 2019. It means more than tripled of gross billings with the RMB 50 million decrease in cash outflow. Quality of our courses and products also got more recognition in the industry. Four of our courses were recently granted 5A rating for online education service issued by China Quality Certification Center. We raised approximately US dollar 232 million of net proceeds through a follow-on offering in February 2021. In addition, the board of directors of both NetEase and our company have recently approved a proposed revolving loan facility to be extended by NetEase to us with a total commitment of 300 million US dollars to support our long-term growth. Let me now turn to the progress of our business operations. Firstly, strengthening our instructor team continues to be a focus for us because this drives the improvement of cost quality. During the fourth quarter, we added another 42 instructors with a total reaching 214. At the end of December 2020, we also had a total of 3,786 highly trained tutors to support our continued growth. For senior high school segments, we recruited 13 instructors and incubated three senior instructors in Q4. With our customized tiered instruction service, we now can meet diversified needs of students of different learning levels. We've also improved our assessment process of students to better match students with courses that have the appropriate difficulty level. Secondly, our junior high school teams continue to work on localized instruction, as we mentioned in Q3. We have launched localized versions of our Chinese courses covering over 30 different locations. Students have started to enroll in these courses to be offered in upcoming spring semester. We will also offer localized test preparation updates and analysis on senior high school entrance exams. Thirdly, we continue to upgrade our interactive features. For example, we introduced a feature called Interactive Voice Answer for primary school courses in this quarter, which simultaneously converted many students' voice answers to text, so the instructor can quickly identify valuable answers. Features like these effectively improve the quality of interaction during our large classes. With these and other advancements in place, we saw significant improvement in retention for our K-12 courses during Q4. Taking junior high school Chinese courses as an example, the retention rate approached 70%. Overall paid enrollments for our Chinese courses for all grades rose nearly four times year over year. For the primary school segment, I'd like to highlight one extracurricular course, You Dao Wei Qi or You Dao Zhong Heng. The course is a beginning online course for Wei Qi or the game of Go. It is a fun course with live video instructions, colorful animations, and also AI-powered practice. Leveraging our new AI capabilities, students can practice their goal game skills adaptively with various level of difficulty with the AI. And we generate learning reports automatically for parents and kids. Yodowitch is a hit product and is growing very rapidly. the retention rate for this course was above 70% in Q4. We have prepared a short video about the product, and it is available on our investors' website, ir.yodao.com, for your convenience. Turning to our courses for adult learners, in addition to existing courses like Logic English, we have a fast-growing new course, Extraordinary Memory, 非常记忆. The course helps learners gain new techniques for better memorization and improve concentration while learning. The approach is effective for learners of different ages and backgrounds and help them become more productive in studying of different subjects. The compound quarterly growth rates for growth billing of this course is about 90% in 2020. I'd like to pause and talk a little about our strategy. Our current product strategy has two sides. One, we are implementing the interactive large-class model we talked about a few quarters back, and building more and more live interactions, some of them AI-powered, into our courses. The voice-answer interaction I just talked about is a good example among many other of these features. Second part of our product strategy is that we focus on a small set of star courses, or we call blockbusters internally, instead of evenly distributing our investments on all subjects and age groups. For example, the Chinese course makes up a large portion of our junior high school business. By focusing on a few courses that are really innovative and solve students' and parents' vital needs, we attract more satisfied and loyal customers and gain better economics for our business. This twofold strategy of interactive and focused courses has driven our quick growth in 2020 and will continue to propel us forward. It fits us because fundamentally, it requires a diverse set of skills our teams have, including technology design, AI technology, and deep user research. and maybe more importantly, the NetEase and Udall culture of patience and collaboration. Turning to our learning products segment, we continue to ramp up our R&D of smart learning devices, investing in hardware technology, AI capability, and learning concepts. We launched the Udall Dictionary Pen 3 in December. It builds on top of the successful business of Udall Dictionary Pen 2, by adding unique features like tap and check, and interactive reading, that allows even faster word lookups and helps young learners read English readers like picture books. We're so happy to see hundreds of primary, secondary, and high schools, as well as universities from more than 25 provinces and municipalities across China have adopted the UW dictionary pen as a valuable learning tool. We have a strong learning device pipeline ahead of us, and we cannot wait to show them to our customers. As we close our books on a football 2020, our teams are more excited than ever about our journey in 2021. As an intelligent learning company, we are committed to deliver great learning content, exciting AI technology, and high quality service. We work tirelessly to capture the growth opportunity of this secular online learning adoption. As we achieve more scale, a natural byproduct will be profitability. We are on the right path to achieve our goals, and we invite you to join us on this journey. Thank you for your time and continued support as we work to bring curious Chinese minds to our intelligent learning vision. With our overview, I will now turn the call over to Supong to review our financial results. We will then open to questions. Supong.

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from our 2024 quarter and the full year. We encourage you to read through our press release issued earlier today for further details. As Dr. Zhou mentioned, we have an exceptional year's progress. Of the progress, we grow in terms of scale and our financial viability some. we made considerable strides, reaching more students, products, and customers. With that, we have changed our segments reporting to more clearly delineate our offering, which better reflects the emergence of our products into three distinct categories. As we continue to grow in each area, we will now be reporting learning services, learning products, and online marketing services. In doing so, we can more readily to see the performance from our courses versus our intelligence devices. Let's move to the financial and operating results of the first quarter. Total growth speeding from our online courses reached RMB 1.12 billion for the first quarter, up 222.8% from 2019. And growth speeding from our premium courses rose to RMB 1.04 billion, up 268.8%, and 18.2% year-over-year and quarter-over-quarter, respectively. Our K-12 segments continue to lead our growth, reaching a record RMB $767 million in gross billing in the first quarter, up 354.5% year-over-year, and up 13.5% from the third quarter. Pay enrollments from our K-12 group reached $659,000 in Q4, up 309% year-over-year. Pay enrollments for premium courses were up by 208% year-over-year, 29% of all new enrolled students' gross billing came from our organic traffic for Q4, which grew 183% year-over-year. This growth shows not only our determination, but our ability to quickly expand our business and that our model is working. For the fourth quarter, total net revenue reached a record RMB $1.1 billion, for U.S. dollars, $169.6 million. This represents an increase of 169.7% from the fourth quarter of 2019. Looking at this growth by segment, net revenue from our learning services will be $731.6 million, for U.S. dollar, $112.1 million, up 198.8% from the same period in 2019. We attribute this growth to a substantial increase in both the pace-building enrollment for K-12 courses of UW premium courses and the growth speeding for pace-building enrollment of the UW premium courses. Net revenue from our learning products for RMB $237.3 million, for US dollar $36.4 million, up 253.8% from the same period in 2019. driven by increased sales of our user dictionary of over 390,000 units in the first quarter. And net revenue from our online marketing services were RMB 137.8 million. For U.S. dollar, 21.1 million, representing a 39.9% increase from the same period in 2019. For the first quarter of 2020, our total gross profit greatly improved, reaching RMB 525.5 million, U.S. dollar, $80.5 million, up 329.2% compared with the first quarter of 2019. Gross margin for learning services increased to 53.9% for the first quarter of 2020, up from the 30% for the first quarter of 2019. The large margin growth was primarily attributable to the better economic scale and the further optimization of our business and faculty composition structure. Gross margin for learning products increased to a 39.5% for the first quarter from the 26.7% for the same period in 2019. The growth was driven by the tremendous growth in the sales of our UDAO dictionary pen, which carries a higher gross margin profile than other learning products. Gross margin for online marketing services was 26.9% for the first quarter of 2020, compared with 31.6% for the same period in 2019. The decrease was mainly due to the increase in performance-based advertisement through the third-party's internet properties, which carry lower margins. For the fourth quarter, total operating expense was RMB $978.2 million, or USD $149.9 million, compared with RMB $326.5 million for the same period last year. We continue to invest in our future and top-line expansion, Specifically, technology, acquiring talent, teachers, and the sales and marketing effort focused on student acquisition and expanding our brand awareness. In Q4, brand and performance advertisement spending on courses amounted to approximately RMB $530 million. As we mentioned in Q3, brand and performance advertisement spending reached its zenith in Q3 this year. These strategies are yielding immediate gains that we expect to also positively impact our brand and retention over the long term. In line with our investment, our model is much more efficient today than it was a year ago, and we are the happy beneficiary of rewards received from our more economic scale. This is our path forward for the foreseeable future. With that, for the first quarter, our sales marketing were RMB 804.8 million, compared with RMB 205.8 million in the first quarter of 2019. Research and development expense were RMB 128.1 million, compared with RMB 89.3 million in the first quarter of 2019. Our operating loss margin was 40.9%. in the first quarter of 2020, compared with 49.7% for the same period of last year. For the first quarter of 2020, our net loss attributable to ordinary shareholders was RMB $447.8 million, or US dollar $68.6 million, compared with our loss of RMB $205.7 million for the same period of last year. Non-GAAP net loss attributable to ordinary shareholder for the first quarter was RMB 433.1 million. For U.S. dollar, 66.4 million, compared with the loss of RMB 186.1 million for the comparable period last year. Basic and diluted net loss per ADS for first quarter was RMB 3.93. For U.S. dollar, 0.6. Non-GAAP basic and diluted net loss per ADS for the first quarter was RMB 3.8. for U.S. dollar, 0.58. Our net cash provided by operating activities for the first quarter was RMB 129.2 million for U.S. dollar, 19.8 million. Turning to our full year results, our total revenue for 2020 increased by 142.7% to RMB 3.2 billion for U.S. dollar, 485.4 million. Net revenue from our learning services for 2020 for RMB 2.2 billion, for U.S. dollar, $330.2 million. Up 207.9% from 2019. Net revenue from our learning products for 2020 grew by 255.1% year-over-year to RMB 540 million, for U.S. dollar, $82.8 million. Net revenue from online marketing services for 2020 were up 4.4% year-over-year, to RMB $472.9 million, or $72.5 million. Total gross profit for 2020 was RMB $1.5 billion, compared with RMB $370.6 million in 2019. Total operating expense for the 2020 increased to RMB 3.3 billion. For U.S. dollar, $499.6 million compared with RMB $971.5 million in 2019. Net loss attributable to ordinary shareholder for 2020 was RMB $1.8 billion. For U.S. dollar, $268.6 million. And the basic and diluting loss per ADF was RMB 15.53, or U.S. dollar, 2.38. Looking at our balance sheet, as of December 31, 2020, our contract liability, which mainly consists of deferred revenue for our online courses, were on the 1.4 billion, or U.S. dollar, 220.8 million, representing an increase of 215.3%. from RMB 456.8 million as of December 31, 2019. At the end of the period, our cash, cash equivalent, time deposit, and short-term investment totaled RMB 1.2 billion, or U.S. dollar, 183.1 million. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Brian Gong of Citigroup. Please go ahead.

Thanks, management, for taking my question. Congratulations on the decent results. So I have a very quick question. So can management share some information about student enrollment and the marketing cost for the winter session in the first quarter? And also, how does management see the competition over upcoming summer sessions? and what's our marketing budget for this year? Thank you.

Thank you for the question. Brian, there's a little breaking in your background. My understanding is we discussed and shared some color regarding on the sales marketing competition or the customer acquisition competition in this winter and any color and any trend regarding on the customer acquisition in this summer, right?

Yeah, yeah, and also some information about the student enrollment for the winter session.

Okay, and Brian, yes, as we discussed over the call, yeah, and as we mentioned in the script, we did achieve a great tremendous achievement in the last year, especially in Q4, and all the student enrollment and also the retention and also the the growth speed of the K12 business reaching the record numbers in the past. And we think for these winters, right now, we didn't offer any official guidelines, but we can share some with you. For this winter, everything, because we are all dedicated to our content creation as well, we really believe that's the quality of the content and instructors and instructors' teaching behavior will be the core value given the growth of the business. So we also will be dedicated on the high-quality content creation, and also we are looking for the path involved with the deep involvement combined with the online courses content and the learning devices. So we think through that perspective, so before us, we think the key metrics to drive growth of our business is not the sales marketing. It's because of the quality of the content. That's what we believe. So right now, I think everything is in line. We didn't see too much change. their abilities for the customer acquisition cost in the past. And we think that will be strictly related to the content creation, to our quality of our content, as well as our product quality. That's the thing we spend a lot of effort and spend a lot of resources on working on that. So that's the things we care about. So I think for our trend, also for the trend regarding the summer campaign or the summer promotions, that's a little bit It will be far away from now, but I think we will definitely be focused. First, we will be focused on the content. Secondly, we will definitely care more about healthy, as we mentioned a lot, and it's a healthy fast growth. That will be care about the unit economics. That means we will care about what can we get in return for our investments. So I think that will be the other strategy we will deliver in the summer. We think we can share with more information when the summer season is coming, we expect.

Just to add to that. So yeah, so so customer acquisition recently has been relatively stable.

Yeah.

So I think part of that is is so so ads that people different players use has been there has been a little bit more rules around those those those ads and the ad has been more kind of the rules are strict so the competition among the players has been a little bit low recently. So that means the price is relatively stable. The other is we're seeing a more and more diversification of customer acquisition, ways to do customer acquisition. So we are doing different ways to do that, and we also see other players doing that. Yeah, so to add to that. Yeah, I hope that answers your question.

Yes, thank you. Very helpful.

The next question comes from Sheng Zhong of Morgan Stanley. Please go ahead.

Thank you for taking my question. I have a few questions. First one is thanks for the update about the interactive technology. And I remember in last quarter, management mentioned that when you will focus on differentiation and then and so that your primary school courses can be different differentiated with others so would you like to give some more updates on your primary school tutoring strategy and the second one is if we look at this full year I think for the K-12 segment, where do you think the major growth will be from in terms of maybe subjects or grades? Because you said you will be very focused on the core, star courses. And lastly, would you mind give some number breakdown about your revenue and the gross billing to the K-12 and adult learning services? Thank you very much.

Yeah, thanks, Sean. I'll take the first one. So regarding primary school, yeah, this is a very important segment for us. Right now, junior high school and senior high school are bigger for us, and we talk about we want to have more innovation, more differentiated products for the primary school segment. And there have been a number of ongoing projects, and I can give you two updates. First is we have extended our Chinese course, which we have a very good reputation for, for junior high school to primary school. So to the fifth grade and sixth grade, we have basically extended the junior high school Chinese course to these two grades. And we adapted the content accordingly, so added the content and also features, technical features for the younger students, like the voice answer I talked about, like also more and more stronger interactions. So that project is going on well. update is uh basically for us um yeah so uh we think for primary school segment uh we are uh uh we are very interested in uh extracurricular courses extracurricular courses yeah so uh the uh we talked about uh is a good example yeah so uh because we we we think it is uh The students in primary schools, the students themselves and also the parents are all very interested in extracurricular courses to develop skills and talents in different areas. We think it's a very interesting area and the REACH course is doing good. So you will see us working more in this area.

And before the second question, I have to take the third question first. And I think for the growth speed and the revenue for the 2021, firstly, we didn't, just repeating, we didn't give any official guidance as in line with our next group. But we think, and also we just try to emphasize again about our strategy to grow our business. First of all, we are focused on the healthy and fast growth. That's the first thing. And that means we care about the unit economics And that we care about the quality of our content and products, which we deliver to our customers, to student customers. And I think with that fundamental content and with that fundamental key factors, we think we can achieve our goals for the growth in our expectation. That's our view of our business growth in 2020 and 2021. And so for your second question regarding the dark forces, and yeah, just like Dr. mentioned, we will be focused, instead of focus on all the subjects for the special grade, we will be more dedicated At the very beginning, we will be more dedicated on some stock courses or some courses we believe we have the best quality, at least one of the best quality leading positions in the market. We will even distribute our resources to for all the subjects in the age group, we will definitely focus on the more strategy to that subject which we are leading on the peers, or leading on the sector. So that will be the long-term strategy for which we operate. That not means we didn't dedicate on to upgrade all the content for all the subjects. We expect to be released more high-quality content year-over-year, just like we mentioned in the summer, in this year, and the math for our business will be eight times in the Q3 earnings relief in terms of the enrollment. We think that kind of achievement can prove that we are on the right track to produce high-quality products for our student customers. That's our strategy on the star courses or the star subjects. Thank you.

Again, if you have a question.

Thank you very much. Sorry, if I may. Sorry for the confusion on the gross billing. Actually, I want to ask the fourth quarter gross billing and the revenue breakdown to K-12 and adults, if I may. Thank you.

So the key cost of gross feeding in the first quarter is $767 million. And so the adult number is about $269 million.

And can provide revenue as well?

The total revenue from K-12 in Portugal is around $400 million.

And the total revenue for DAF is $214 million.

Okay.

Thank you. Thank you. Thank you so much.

Thank you. Again, if you have a question, please press star then 1. The next question comes from Alex G. of Credit Suisse. Please go ahead.

Okay. Thank you. Congratulations are very strong. and thank you for taking my questions. My first question will be about your growth target in 2021. I think for the second half of 2020, We're also encouraged to see the acceleration of growth in the second half versus the first half of 2020. And we're looking to show more color on how we expect this kind of trend to continue. And since you have raised the funding recently and gathered new voting credits, but it's making more comfortable and will increase your targets. And secondly, I see very strong results from the growth from the hardware learning products business. You can give us more color on, for example, the sales volume of your dictionary. Dictionary 10 in 4Q and also in the last year, and how much percentage of the Dictionary 10 buyers will be RK-12 students. And what is the factor that holds a very strong sequential growth in the Dictionary 10? the new generation of products or the new sales channels? Thank you.

I'll take the first one. Regarding 2021, our teams are very bullish about 2021. As you said, for 2020, it's the first year that we I seriously participated in the summer campaign for acquiring large number of students. Yeah, so in Q3, we had about half a million enrollments. In Q4, it's already up to 650,000. Yeah, so very quick growth. And if you look at our Q4, Q4, we have positive operating cash flow because, mostly because the retention in Q4 is above our expectation. Yeah, so it's given all the information that our teams, I think 2021 is going to be a good year for us. And the strategy remains the same. Yeah, so we are focusing on different projects for each different age group because the age groups, students there have very different requirements and needs for their courses. For high school, as we talked about, we're doing tiered or multi-level instruction because students really, they have, high school students have very, very limited time. Yeah, so the quality, the learning efficiency, the quality of the courses really matter. So you have to have the good level of course for each different group of students. Yeah, and also for junior high school, we talk about, A LOT ABOUT LOCALIZED CONTENT BECAUSE THAT'S THE KEY PAIN POINT FOR JUNIOR HIGH SCHOOL STUDENTS. SO DIFFERENT STUDENTS, THEY LEARN THINGS IN DIFFERENT ORDERS AND THEIR TESTS, EXAMS HAVE DIFFERENT CONTENT IN EACH DIFFERENT CITY AND PROVINCE. SO WE HAVE PREPARED THAT And it's already launched. It's online. And the courses will start in the spring. Yeah, so with these, we think we are very confident about 2021. And of course, there's the devices business. We also think we are leading in the industry, and there's as we get to know more and more parents buying our devices, the teams have a lot of new ideas. So they are working on new products. So overall, we think we can maintain a relatively high growth speed in 2021. And obviously, customer acquisition is – is a variable, right? Yeah, so every year will be a little bit different, but I think our strategy works because as the markets become more and more mature, it's only the best products that can acquire customers. Yeah, so maybe two or three years ago, you can flood the markets with capital, with money, and you can get a lot of students. But now... you have to have the best course for a certain subject. It has to be innovative. It has to be kind of solve the problem of the students to be able to kind of acquire students efficiently. And many of our courses can already do that. Some, they are still working on their UE So we will manage this process and be patient. And we think we can have a good 2021.

Yes. We have some more information about the lending products. Our lending products are growing very fast. The main channel of our lending products may be online. The official flagship store of UDAO ranked number one by electronic dictionary sales on e-commerce platforms such as Tmall and Jingdong in the W11 shops festival in 2010. The Dictionary Pen 3 released last December maintains the leading position in the market. We totally shipped over 390,000 units of UDAO Dictionary Pen in the fourth quarter. and about maybe 20% of these are latest 3.0 version. In 2021, linear devices sales are expected to keep the sustainable growth. We believe that linear devices are not only a new channel for the customer's acquisition, but also the impact and awareness of the user. We target to create more natural scenarios for the conversion.

Thank you. Got it. Just a very quick follow-up. So for the buyers of the learning product devices, how much of them will be K-12 students and how much will be adult students?

About maybe 70% of the... As we disclosed in the Q3, in the numbers, we disclosed over 70% is in the KTOB group, of our user dictionary purchase. And we think, thinking of the figures of the user dictionary pen, that will be specially designed for the English learnings. And so we believe that in the long run, the majority of users will be in the KTOB group. That will be the trend for the long run. And for this, we expect that will be, as the doctor mentioned on the call, and we will also have the different learning devices in our pipeline to serve to the different demands for the learning scenario. So we expect we can just have more learners, especially for those students below the 18th to be our learners. Thank you.

Got it. Very helpful. Thank you.

The next question comes from Jesse Zhu of Nomura. Please go ahead.

Thanks, Benjamin, for taking my question. My first question is also on smart devices. The revenue and gross margin of the smart devices are both encouragingly strong in the fourth quarter. So I want to understand how it's the shipment of the dictionary pen in January and February. What's the trend? And secondly, how we should think about the gross margin outlook for smart devices for the next few quarters. And talking about gross margin, if you could also comment on on the gross margin outlook for premium corn system would be great. Thanks.

Hi, Jessica. Thank you for your question.

For the gross margin for our dictionary 10, I think we're close to 40% in 2020.

very good improvement compared with last year due to the volume we sold.

We expect to have a bit more improvement on the gross margin of our learning products due to the large business scale and new SQUs with higher margins will be sold more in the future. of our learning services. I think we've got a sharp increase in 2020.

Going forward, we still have improvement on our learning services on annual basis.

But because, firstly, we expect more from none of you. We believe large class youth teachers model will continue to gain more benefits as we achieve more economic up-skill. We believe our gross margin will rise to industry median high level, say 60% to 70% in the long run. Secondly, we have more room to achieve higher ASTs. The average selling price for paid enrollment for our premium courses was around 1,343 in 2020, up 49% year-over-year. However, the ASTs were relatively cheaper when compared with some of our online and offline tier.

We will continue to invest more in our coffee, so we believe our users will be willing to pay a higher price.

Finally, we expect we will get a better compensation structure. If we achieve a large scale, we have more room to optimize our compensation structure

which also leads to a better GP magic, which is helpful.

Thank you, Benjamin. If I may, I have another question regarding preschool learning products. It seems to be increasingly popular among parents. We know we have multiple online learning tools and courses, so I want to understand what is your view and your strategy here.

Thank you. I said preschool learning products services.

Yes, preschool learning services.

Yes, yeah, of course. Yeah, so this is an area where if you follow us for a long time, you will know that we've been working on the preschool courses for quite some time now. So we have You Dao Math, we also have Le Du, the Chinese reading app, and also Wei Qi also covers a lot of preschoolers. So as I said in the preparer mods, we think extracurricular learning and also before school time preschool learning is a very interesting area. In the market, we have AI courses, we have small group courses, a lot of different form factors of courses. For us, we think that you have to have a very good combination of actually being interactive so that the content is active to the kid, and also not to make this just to pass time. You have to have good learning results. So that's a balance we want to strike, which is a very good example of our philosophy. We think that the kids really love the course, and it is an area where where the existing products on the market is not up to the standard, I would say. So we will keep looking for opportunities like this. And, of course, we have multiple ongoing projects, and we think we're investing in them because we think their directions are very promising. We think we can have multiple successful products in this area. In some sense, it's a little bit like the adult-oriented courses that we have. We have a good model of incubating courses in these two areas. For adult level, we already have multiple courses at scale. Yeah, so for Logic English, for the Extraordinary Memory, and a couple of others. Yeah, so we think we can also do that for preschool courses. Yeah. I hope that answers your question.

Yeah, I can see. It's different. For the comments regarding these preschool products, we think for another part, as you know, Dictionary Pen 3.0 is also another, it's a new generation of Dictionary Pen. It also enables interactive reading functions, especially for the preschool kids. And we think that will be another new channel for us to convert our users into the preschool products for the services. We think that will be the combined strategy for us to develop the market of the preschool business. Thank you.

Thank you. That's very helpful. Thanks.

The next question comes from Hongyi Cao of CICC. Please go ahead.

Hi. Can you hear me?

Yes.

Yeah. Thanks for taking my question and congratulations for the good results. Some of my questions have been answered, so I just have a quick following question about learning devices. So as we see, the learning project took up 20% of the revenue this quarter. So what is our expectation of this proportion in the future, like in the long term? And the second question is, so we learned a lot about our strategy for the T12 learnings And can you update more information about the left part, such as the MOOC online classes? And do we have any future plan to develop like to the business or like other strategy cooperation with the university part? Thanks.

Yeah, of course. Yeah, so the Dictionary Pen is doing really great in Q4. And we actually only released Dictionary Pen 3 at the end of Q4, December. So we think the products will have a long runway ahead of them. And Regarding future, we want our courses and our learning devices to both be very successful. We don't want to put a percentage number on them. For the short to mid-term, I would say courses, of course, will be a majority of the business going forward because it has really high growth and we have a lot of really exciting star courses coming up. We also said that the devices, we will have new devices for this year, more than one. We feel good about both sides of the business. Of course, we want them to strengthen each other. We have been talking about that for some time now. we will keep working on cross-selling between the two categories, and we will report back when we have results. Yeah, and regarding university products, yeah, so internally, we basically, we think, so we categorize it in this way, basically, for all the products, targeting learners over 18 years old. We try to put them in the same category. And we want the teams to work with each other to have a holistic strategy for adult-oriented products. And we really like our MOOC product, China University MOOC, and also NetKeys Cloud Classroom. These two are kind of one of the most, two of the most important successful online learning products for university-level learning. So we really like them. We feel responsible to keep them in good hands for the future. So actually we will have something to announce maybe in a month. Yeah, so we have been working on them for some time now. Yeah, so we will have something coming up. So, yeah, just follow us, yeah, if you are interested. Yeah, thank you.

Thank you. And the last question today will come from Benny Wong of HSBC. Please go ahead.

Thank you, management, for taking my questions. So I just want to understand that if we look into 2021, what are your investment priorities and also say technology on user acquisitions and also how is our strategy to compete will be different from last year, especially considering, as we talked about earlier, that we're regulatory scrutiny in terms of the heavy, aggressive subsidies or sales and marketing strategy. And do you expect that those will be coming, you know, rationalized among the players and should we read as favorable or unfavorable to your doubt? Thank you.

Yeah, so regarding competition, yeah, I would just say, yeah, we prepare for tough fights. Yeah, we don't assume the market will be friendly to us. Yeah, so that's always a good approach to take. Yeah, so we think given that adoption of online courses continue to rise, yeah, we will expect competition. still large-scale kind of customer acquisition activities, kind of high level of that in the marketplace. And our teams are good at this. So because we have good content, highly competitive courses, so we think our customer acquisition cost is low. You can see that from us achieving three-quarters of positive operating cash flow in 2020. So we think we're good at this. We're competitive. And also, what you talked about is right. I think players will be more rational. because of restrictions and limits placed on the market by the regulators, I think it will be good for the benefits, for the health of the industry in the long run. And because our customer acquisition techniques have been always within the rules, we think we will continue to do good. Yeah, thank you.

Okay, thank you. So do you think that the marketing spend in general, other players would spend less in terms of the subsidies or maybe less aggressive sales and marketing strategy? Or you think that overall, and this is something that you're down, how should we read in terms of directional, if the sales and marketing spend in 2021, should we expect a deleverage, at least as a percentage of revenue?

Yeah, it's just the beginning of this year. Yeah, we can just give you everything Dr. Wu mentioned about this, about the trends and the strategies from our perspective. And we think that we should discuss about the detailed number. Even the range is just beginning of this year, and it's very difficult to predict about this uncertainty, average uncertainty, especially in summer. We think that we should discuss about this kind of result. Probably we can share more information. At least probably close to summer or after summer. You know, it always will be the key season to acquire the new student for the online education business.

Okay.

Thank you.

Okay, great, great. Thank you so much. I appreciate it. Thank you.

And that concludes the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

Thank you once again for joining us today. If you have any further questions, please feel free to contact us directly or reach out to CPG Natural Relations in China or the U.S. Have a great day.

Thank you. The conference has ended. You may disconnect your lines.